Question
Mr. Knowitall is considering a new line of products to his kitchen tool business. He is thinking about adding a line of cookware which he
Mr. Knowitall is considering a new line of products to his kitchen tool business. He is thinking about adding a line of cookware which he calls "Unique".Mr. Knowitall estimates that the most likely yearly incremental cash flow will be $26,000 but he is not sure.He had his financial manager estimate the potential cash flows for the new product line along with their associated probabilities of occurrence. The estimates are:
Cash FlowsProbability of Occurrence
$20,0001%
$22,00012%
$24,00023%
$26,00028%
$28,00023%
$30,00012%
$32,0001%
The standard deviation of the estimated cash flows is:
The Coefficient of Variation is
If Mr. Knowitall's other product lines on an average have a Coefficient of Variation of 14%, what can we say about the risk of this product line relative to his other product lines:
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